It describes the tendency to continue down a particular path just because you’ve spent a significant amount of effort, money and/or time on that path — regardless of whether the costs of doing so still outweigh the possible benefits.
There comes a time when following a particular path may not make sense anymore, and it applies to many aspects of life, including career paths, individual tasks, relationships, and investments.
Below is an in-depth description of why this is so and a better approach.
How to Avoid Sunk Cost Fallacy
Sometimes, avoiding a detrimental situation such as the sunk cost fallacy can be challenging, especially if you take the same approach to thinking and problem solving as you have in the past. If you want to change your path, you must diversify your focus.
This could include approaching a problem from a new angle, being creative in attacking a challenge or trying something completely new. When you do this, you’ll be able to gain new perspectives on your situation. This, then, allows you to analyse what your future and current costs of what you’re doing are and compare that alone to what the potential benefits are.
This helps you see things from a forward-thinking perspective rather than a backwards-looking one.
Let Go of Past Failures
One of the biggest reasons the sunk cost fallacy exists is that people have a tough time letting go of past failures. As a result, they often focus on the past and what they did that led to those failures rather than focusing on how to fix whatever is wrong.
The downfall of doing this is it paralyzes you from making necessary adjustments to change your future. When you focus only on what you did in the past and how you failed, you’re likely to repeat many of those mistakes.
There have been many studies into the psychology of loss and failure and how it affects the human psyche. For example, it can make goals appear to be unattainable. It can distort a person’s perception of their own abilities. It can engender a feeling of helplessness and lead to a fear of future failure.
When this happens, people tend to fall back on what they know, which, in many cases, is what led to the past failures in the first place. Letting go of past failures, then, is critical to future growth.
Make Evidence-Based Decisions
When you make decisions based on past failures, you typically will make emotional decisions. In many ways, this is not a good thing. Emotions can drive us to do amazing things, but they can also drive us to make decisions that aren’t logical.
Emotions make decisions subjective rather than objective, and objective decisions are the ones you need to make if you want to avoid the sunk cost fallacy.
As Fahim Imam-Sadeque explains, you need to make decisions based on the evidence. When you focus on that, you’re able to see how things currently are and what they likely are to be in the future, as opposed to how things were and have been up to this point.
Your intuition may be to stick to the plan and continue operating as you have before. This can be disastrous, though. So, try taking a new approach and let the facts and evidence guide you where you need to go.
About Fahim Imam-Sadeque
Fahim Imam-Sadeque is a business development professional with proven experience in the asset management industry. He has a Bachelor of Science in Actuarial Science from the City University of London and is a Fellow of the Institute of Actuaries. Fahim’s top skills include asset management, hedge funds, investment management, sales, and consultant & client relationship management.
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